Starting July 1, interest rates on federal student loans are set to rise from 3.4 percent to 6.8 percent. As Congress again considers preventing the interest rate on federal student loans from doubling, the cost to taxpayers should be a central issue.
However, in a recent Issue Brief, Heritage analyst Jason Richwine points out that the federal government’s current accounting practices mislead taxpayers about the cost of loans. Actual costs are much higher than reported, but it is unclear just how high they are.
How is this possible? In budgeting for student loans, Congress faces the risk that students receiving loans will not pay the government back as expected. The government tries to estimate how much it will receive in loan repayments, but there is a substantial risk that those repayments will be lower than anticipated. Incurring risk comes at a cost to taxpayers, but current accounting methods ignore it.
The Congressional Budget Office recognizes this problem and has repeatedly argued for “fair value accounting,” which would reflect the full cost of student loans and other federal credit programs. Under the principles of fair value accounting, the price of market risk is added into cost estimates. It gives Congress—and taxpayers—a more accurate picture of the actual costs of student loan subsidies. This clarity would benefit taxpayers and allow Congress to make an informed decision on the subsidy expansion.
It is unwise for Congress to expand the student loan program without a full understanding of the cost involved.
Brittany Corona is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please click here.